SaaS is the growth sector in the software industry. It has grown through a subscription based recurring revenue model. There is nothing wrong with this model. But explosive growth cannot last forever. And once SaaS is dominant in the industry pricing and revenue models will be just another way to compete. SaaS businesses should be more creative. Startups can look to alternative revenue models for competitive differentiation.
Many years ago I worked in Johannesburg. I was a manager at the time and I learned a lot from the experience. My mind was broadened by the cultural experience. The fascination of watching a wonderful country emerge from a dark time. I also worked with some great people.
One partner in particular taught me much. He had a trick when approaching a new client. He would arrive for the first visit, get out of his car and sniff the air in the car park for a few moments. Based on his impressions of the head office and the feel of the place, he would estimate the fee potential. Weeks later our proposal would be accepted. Only after much poring over spreadsheets and agonising about margins. He would turn out to be spot on.
Experience and Experiments
Pricing is all about experience. Which creates a challenge for many startups. I fear that SaaS has become narrow minded and predictable when tackling this issue.
Right now it feels like we have adopted the wrong definition for the acronym SaaS. It is supposed to stand for software as a service. In almost every business it has become software as a subscription. You pay a fixed amount per month for using the software. With slight variations based on premium features, number of users or similar. The only discussions are about the monthly cost. And how to present the best option on the pricing page.
Services Are Not Based On Subscriptions
There is nothing wrong with subscription. It works well for magazines or insurance companies. The closest it gets to software in the old days is cable TV. Or access based products like broadband or mobile.
Yet in the pure services industry it is almost unknown. I worked in professional services for 30 years. Over that time we had exactly zero revenue from subscriptions. The same is true of many other services. A hairdresser, a plumber, a freelance developer or a copywriter. None charge subscriptions.
Look To Service Industries For Alternatives
SaaS companies need to start considering the alternatives. In my career, the main revenue models we used were:
SaaS Startups Can Differentiate On Pricing
There are many other variations and combinations. Yet the SaaS industry is offering only one billing model. The variety and specialism of products is bewildering and awesome. When you get to pricing, all of a sudden everything looks the same. This is nowhere more true than in SaaS aimed at SMEs when prices are displayed on the company website.
It does not make sense. Pricing is a key differentiator in any competitive market. It is not just about the sticker price. SaaS companies are closing off a whole range of opportunities. You can use pricing and offers to appeal to customers in many more ways.
Some Ideas For SaaS
I hope that in future we will see different models emerging. Slack has started the trend with its usage based model. Benefits and others are free to use because of an advertising/ marketplace approach. What else might we see? Here are some ideas to think about:
SaaS is already a competitive industry. The pressure will increase as margins fall and the industry consolidates. For many B2B functions, buyers will take a commodity approach. Things like finance systems, CRM and procurement will be hard to differentiate on function.
Cost becomes a big factor in the buying decision. Different revenue models will offer more flexibility to compete. Get creative with pricing structures to offer better value and stand out from the crowd.
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Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.